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Liquor Wholesalers Settle Probe Of Pay-to-play Practices

Attorney General Spitzer and State Liquor Authority Chairman Daniel Boyle today announced an agreement to resolve an investigation of illegal marketing practices by wine and liquor wholesalers in New York.

Under the agreement, the states eight largest wholesalers will adopt a series of reforms and pay $1.6 million in fines and costs.

"For decades, pay-to-play practices were rampant in the states alcohol industry as retailers, wholesalers and suppliers used a variety of schemes to avoid the clear directive of the states Alcohol Beverage Control Law," Spitzer said. "The system benefitted a favored few, to the detriment of thousands of smaller stores, bars and restaurants."

"Today, as a result of this agreement, these illegal schemes have been halted and a level playing field restored throughout the industry. Ultimately, consumers may see lower costs as a result of fairer competition."

Daniel Boyle, Chairman of the State Liquor Authority said: "This joint effort between the State Liquor Authority and the Attorney General's Office has produced an agreement that will effectively end the industry's unlawful business practices that often harmed the operations of licensees across New York. We remain vigilant in our commitment of ensuring that our State's alcohol industry fully complies with the law, and this agreement is an important part of that ongoing mission."

Steve Glamuzina, President of the Empire Liquor Store Association and the proprietor of Georgetown Square Wine & Liquor said: "Certainty and transparency give stores like my familys a chance to compete. In the past our costs were simply a guessing game and a function of who your friends were at the wholesale level. On behalf of the hundreds of family run businesses I represent, I want to thank Attorney General Spitzer for ensuring that my business and others like it can survive and hopefully prosper in the future."

The Attorney General began a probe of misconduct of the state liquor industry in 2005. At issue was whether wholesalers were offering inducements to liquor stores, bars and restaurants to reward certain customers and influence their purchasing decisions. Incentives, financial or otherwise, are in violation of the New Yorks Alcohol Beverage and Control Law, which explicitly prohibits manufacturers and wholesalers of wine and liquor from favoring select retailers, bars and restaurants with discounts, rebates, allowances, free goods, and other inducements.

The investigation revealed a surprising array of illegal activities, including:

Deeply discounted products were provided to favored retailers;

Free cases of wine and spirits were provided if the retailer was willing to buy certain products in certain amounts;

Outright payments of cash and cash equivalents such as AMEX gift cards, free trips, and consumer items such as iPods, golf clubs and gas grills were routinely offered. One wholesaler actually spent over $400,000 on AMEX gift cards to reward favored clients.

The investigation also revealed that wholesalers had developed complex strategies to shield the payoffs from regulatory scrutiny, such as:

Sham credits were given to retailers who purchased product at full price to hide illegal discounts; and

To avoid prohibitions against direct payments by wholesalers for retailers advertising, retailers set up display and advertising companies to act as conduits for cash from wholesalers to retailers. The sham advertising companies were typically run by a spouse or other relative of the retailer. Payments were linked to agreements by the retailer to buy a specified amount of product from the wholesaler. Investigators believe that this was the single largest abusive practice. Such illegal payments from wholesalers to liquor stores' sham display companies totaled over $18 million during 2003-05.

From 2003 through 2005, the aggregate value of the illegal benefits bestowed by the companies upon favored liquor stores, restaurants, nightclubs and bars exceeded $50 million, according to investigators.

Under the agreement, the wholesalers will halt all payoffs and other illegal inducements. Each of the wholesalers has agreed to file an affidavit with the attorney generals office within 60 days to show that it is complying with the agreement.

In addition, the wholesalers will post their wholesale price schedule. This reform will effectively end "blind pricing," an illegal practice in which favored retailers receive massive discounts on specific products while their competitors pay regular wholesale prices.

Investigations of the supplier and retail tiers for similar violations are continuing.

Attorney General Spitzer has also called for a reevaluation of the current law, which was established after Prohibition. Spitzer noted that the many of the practices identified in the investigation are legal in the context of commodities other than alcohol. He said the real problem in the industry was not purchasing incentives themselves but the fact that those who disobeyed the law had gained an unfair advantage over those who did not.

Spitzer acknowledged the New York State Liquor Authority for their ongoing assistance in the investigation.

The investigation underlying today's Consent Order and Judgement was conducted by the Attorney Generals Buffalo Regional Office. It was led by Assistant Attorney General Dennis Rosen in coordination with Assistant Attorneys General Michael Siragusa and Stephen Gawlik, with Senior Investigator Peter Eiss and Law Assistants Jeffrey Davis and Jeffrey Weimer. The investigation was supervised by Ken Schoetz, Assistant Attorney General in Charge of the Buffalo Office, and Marty Mack, Deputy Attorney General.

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